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 January 6, 2016 - 5:38 PM EST
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Fitch Rates Cleburne, TX's GO Bonds 'AA-'; Outlook Stable

Fitch Ratings has assigned an 'AA-' rating to the following Cleburne, Texas (the city) bonds:

--$24,915,000 general obligation (GO) bonds, taxable series 2016.

The bonds are scheduled for sale via negotiation the week of Jan. 11 to acquire land and construct a minor league baseball stadium and associated infrastructure.

Fitch has affirmed the 'AA-' rating on the following outstanding obligations of the city:

--$34.9 million combination tax and revenue refunding bonds, series 2013;

--$8.3 million combination tax and revenue certificates of obligation (COs), series 2013;

--$12.7 million GO refunding bonds, series 2008, 2010, and 2011.

The Rating Outlook is Stable.

SECURITY

The GO, revenue bonds, and COs are payable from a property tax limited to $2.50 per $100 of taxable value. The revenue bonds and COs are additionally secured by a de minimis pledge of net utility system revenues, not to exceed $1,000.

KEY RATING DRIVERS

HEALTHY FINANCIAL PERFORMANCE: Financial management is sound, reflected in a willingness to raise revenues, adjust spending, and budget conservatively during periods of economic pressure to produce surpluses and enhance the city's fund balance position.

WELL-LOCATED ECONOMY: The city is situated near the broad labor market of the Dallas-Fort Worth (DFW) metropolitan statistical area (MSA), access to which has been enhanced by a major highway project. Job growth has somewhat stagnated recently, yet improvement is likely in the near- to intermediate-term.

TAX BASE IMPROVEMENT: The city's tax base has returned to growth after a period of contraction due to a decline in drilling activity in the Barnett Shale, a large natural gas formation in the area. Formerly very high industry concentration in the oil and gas sector has been tempered as a result, and modest tax base growth is expected to continue given residential and commercial development underway.

MANAGEABLE DEBT BURDEN: Debt levels are moderate and outstanding tax-supported debt amortizes rapidly. Additional tax-supported debt over the near-to-medium term is plausible given the prospects for continuing population growth that would drive infrastructure investment.

RATING SENSITIVITIES

STRONG BUDGET PERFORMANCE: A continuing trend of strong financial performance and maintenance of a sound fiscal cushion could lead to positive rating momentum.

CONTINGENT RISKS: The rating could be pressured if general fund revenues are used to support the voter-approved baseball stadium in a manner that dilutes its financial position or flexibility.

CREDIT PROFILE

Cleburne is located 30 miles south of Fort Worth within the Barnett Shale natural gas play. It is the seat of Johnson County ('AA+'/Outlook Stable). The city's estimated 2014 population is approximately 30,000, reflecting 1.2% average annual growth in the last decade.

SMALL BUT EXPANDING ECONOMY IN THE DFW MSA

Principal industries in the city include manufacturing, distribution, and agribusiness. The city's industrial base is diversified across building and construction materials, power generation, chemicals, oil and gas equipment, transportation, and distribution services. Cleburne's unemployment rate typically trends lower than national averages, yet sluggish growth has recently tempered improvement in the city's rate, which at 4.9% as of October 2015 is slightly above the state (4.5%) and nation (4.8%).

Potential for near-term growth in the local economy is tied to the city's proximity to the large DFW job market. Access has been enhanced by the completion of a major arterial highway that provides a direct link to Fort Worth. The DFW employment base is extensive and the region is outperforming the nation in post-recession job, income, and population growth.

TAV LOSSES SUBSIDE

The city lies over the Barnett Shale play, one of the largest natural gas fields in the U.S. Recent weakness in valuations across the residential, commercial, and industrial sectors was a result of decreased drilling activity due to depressed natural gas prices. The cumulative contraction in the tax base from 2011-2015 was a moderate 12%. The tax base returned to growth in fiscal 2016 marking a solid 4.3% increase. Taxpayer concentration remains elevated with the top 10 taxpayers making up 21% of taxable assessed value (TAV) but has come down from a high 32% in 2009 due to declining valuations of oil/gas firms. The top taxpayer group is now diversified with construction, engineering, retail, chemical and utility industry presence.

RETURN TO REVENUE GROWTH

Property taxes, charges for services, and sales taxes are the predominant revenue sources for the general fund. City officials confronted the declining TAV trend by incrementally raising the tax rate, and there remains ample room under the cap. Sales tax performance was particularly weak post-recession, declining by a compound annual average of 6% from 2008-2013. Fiscal 2014 saw a strong year of growth at 10% over the prior year, and unaudited fiscal 2015 results show a 1.9% increase over the prior year. Management prudently assumes no growth in the sales tax revenue stream for planning purposes given past volatility, and Fitch expects flat to modest growth in the near to mid-term.

Fiscal 2014 concluded with a general fund unrestricted fund balance of $15.2 million or 43% of spending, after a $4.4 million transfer out primarily for future road maintenance. The year ending Sept. 30, 2015 will likely report similar results, closing out the year with a $1 million draw on fund balance after a $3 million transfer for future road maintenance. Management notes the positive operating results are due to strong revenues and an underspending of the budget.

At the end of fiscal 2015 reserves are comfortably above the city's formal policy that requires an unrestricted fund balance at or above 90 days (25%) of expenditures. The fiscal 2016 adopted budget remains largely unchanged from prior years and management reports the likelihood of using some set-aside fund balance for capital throughout the year.

MODERATE DEBT BURDEN THAT AMORTIZES SWIFTLY

The city's overall debt load increases with this issuance to a still moderate $2,866 per capita and 3.9% of market value. Carrying charges for debt service are affordable at 12% of governmental expenditures in fiscal 2014. Amortization of debt is rapid with 76% of principal retired within 10 years. Management is in the process of finalizing a long-range infrastructure assessment, yet reports that additional tax-supported debt will likely be minimal with the majority of general government needs addressed on a pay-as-you-go basis.

BONDS ISSUED FOR ECONOMIC DEVELOPMENT PROJECT

The bonds proposed for issuance will fund the purchase of land for the construction of a multi-use baseball stadium. The stadium represents the city's contribution to a $100 million mixed-use project featuring retail and restaurants. The city expects to execute formal agreements with respect to the construction and operation of the stadium on Jan. 12th and is in the process of forming a baseball team with an investor group led by professional sports managers.

The land acquisition and stadium construction was approved by voters by a wide margin in November 2015. Voters also approved a 1/2 cent sales tax levy that will be allocated to the newly created Cleburne Type A Economic Development Corporation (the corporation). The city plans to use the 1/2 cent sales tax to pay principal and interest on the series 2016 bonds, as well as for maintenance of the ballpark once completed. Using the city's fiscal 2015 actual sales tax collections the new 1/2 cent sales tax would generate approximately $2.8 million or 1.3x maximum annual debt service (MADS) on the bonds. The corporation and the city have a formal agreement in place that requires principal and interest payments to occur before the 4A sales tax revenue can be used for any other purpose.

The basis for the rating on the bonds is the city's general obligation and levy of property taxes up to the $2.50 per $100 TAV cap to pay debt service. The city's current tax rate of $0.804 provides considerable cushion to offset potential declines in sales tax collections. Additionally, management can raise up to 8% more in operating revenue over the prior year without voter approval to subsidize stadium operations, which represents about $1 million using 2014 audited figures.

PENSION FUNDING LEVELS IMPROVING

City employees participate in one of two pension programs: the Texas Municipal Retirement System (TMRS), an agent multiple-employer plan which serves the majority of city staff, or the city-sponsored Firemen's Relief & Retirement plan. TMRS' funding levels have improved steadily following a system-wide restructuring of actuarial assumptions and internal fund accounting, reaching a 74% funded level as of Jan. 1, 2014 using the system's 7% investment return rate. The city's annual contributions to TMRS reached full funding as of fiscal 2013.

The firefighter's plan funded position was at 54.4% using a 7% investment return rate assumption, and its unfunded actuarial accrued liability totaled $32.7 million or 1.6% of market value. Additionally, the plan utilizes an open amortization period that could delay full amortization and/or increase future contribution requirements. The combined actuarial required contributions (ARCs) for both plans consumed a manageable 9.6% of government spending in fiscal 2014.

Retirees and their dependents can purchase health coverage from a city plan at the group rate, and receive city-paid coverage for up to five years with 25 years of service. The city funds the costs of these benefits on a pay-go basis. The plans' fiscal 2014 unfunded actuarial accrued liability totaled $5.8 million or a nominal 0.2% of market value. Combined fixed-costs for debt service, pension ARC, and other post-employment benefit (OPEB) pay-go consumed a slightly elevated 22.2% of fiscal 2014 governmental expenditures.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Municipal Advisory Council of Texas.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997559

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997559

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Leslie Ann Cook, +1-512-215-3740
Analyst
Fitch Ratings, Inc.
111 Congress Ave, Ste 2010
Austin, TX 78701
or
Secondary Analyst
Rebecca Moses, +1-512-215-3739
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com


Source: Business Wire (January 6, 2016 - 5:38 PM EST)

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